The Greeks are having another election on 17 June. The 6 May election was a disaster for the Troika. An anti-austerity party, Syriza, gained the balance of power and ensured that no pro-Troika government could be formed. Now Greece is in a limbo for another month under a surprised premier, Panagiotis Pikrammenos, the president of Supreme Court.
But the Greek economy is not standing still. On the contrary, the economy is beginning to melt down. First, the austerity measures are collapsing. In June, Greece should have improved tax collection by 1.5 percent of GDP, reduced social spending by 1% of GDP and implemented another pay cut and reduced public sector jobs by 12%. It has not done so. Also, unpaid debts owed by the government to third parties for over 90 days now stand at €6.3bn euros, or 3.1% of projected GDP this year. Athens is supposed to shrink its budget hole to 6.7% of GDP this year based on a supplementary budget approved by parliament earlier in the year. The EU Commission’s spring forecast sees the deficit at 7.3%.
More immediately, the Greek president announced during coalition negotiations last weekend that deposits in Greek banks are falling by up to €1bn a day. At that rate, the banks will be under water before we get to the election result. The banks will have to rely on emergency lending assistance (ELA) from the Greek central bank. But that requires collateral and Greek banks are running out of those too.
Worse, the ECB is not willing now to take collateral from some Greek banks because they have not yet restructured their balance sheets since private sector involvement (PSI) bond swap, which required them to recapitalise. Recap funds from the EFSF have been delayed because of the political impasse and the ECB wants to wait for that funding. So, in the meantime, the banks must again rely on ELA from the central bank. All these demands for ELA will drive up the central bank’s liabilities to the Eurosystem (already at €125bn) to new heights. So a financial crisis is brewing in Greece while its politicians start an election campaign. I
It seems that Mrs Merkel and other Euro leaders still do not get it. A Greek default is seen as a ‘one-off’ without serious consequences for the rest of the Eurozone. But that’s wishful thinking. I have estimated the exposure of other Eurozone states (and their taxpayers) to a disorderly Greek sovereign debt default. Adding up what the Greek government owes to other EU governments from the two bailouts, what the central bank debts are to the Eurosystem and how much the ECB has already lent to Greek banks and holds in Greek government debt, we find that the Eurozone is exposed to around €500bn of potential losses, or near 5% of Eurozone GDP.
Germany and France alone are exposed to around €150bn each. And this is just exposure to sovereign debt. If the Greek private sector should also default on its loans. French and German banks will take a sizeable hit (French banks have about €25bn lent to Greek companies. When you add all this in, the total exposure is closer to €750bn.
The Germans and other Euro leaders seem unwilling to renegotiate the bailout package to reduce Greek public debt and reverse the austerity measures as any Syriza-led government will demand. That poses the likelihood that the Euro leaders will force Greece out of the euro by cutting off funding to the government and to the banks from the ECB. The Greek government only has cash to last until the end of June to pay for public sector salaries and services. With the ending of Troika money, it will default on its debt obligations. Then the Euro leaders can expel it from the euro system, even if the Greeks go on using the euro for money. The IMF reckons that this will cause a 10% contraction in Greek real GDP over the next year and with a 50% devaluation in any new Greek currency, inflation would jump to 35%. Credit for companies and households would disappear, so bankruptcies will mushroom. The Greek government would have to act to nationalise the banks, impose capital controls on any flight of money out of Greece and also take over major companies.
The rest of the Eurozone and Europe will not escape from the consequences of a Greek exit. The whole of Europe would be plunged into a deeper recession, probably contracting the European economy by up to 5% in one year, while inflation would rise too. So the Germans and the other Euro leaders will have to decide what to do or the euro itself could head towards break-up before the year is out. The firewalls against ‘contagion’ are not adequate. The new European Stability Mechanism (ESM) is still not in place and its effective functioning could be delayed until the autumn while the German parliament gets round to ratifying it. The ECB does not appear willing to consider any more extraordinary measures for liquidity support to the PIIGS. And the Euro leaders are bickering about austerity or growth.
And austerity is not working. The irony is that before the crisis, fiscally-prudent Germany saw public spending rise at a much faster rate than in Greece or Spain, but since the crisis, it is Greece that is taking a truly humungous hit to public services and conditions.
There is a way out of this. But it’s not on the basis of the pro-banking, pro-capitalist policies of the Euro leaders. Greek state finances would be fine if the richest Greeks paid taxes and did not spirit their money offshore to buy property in Kensington, London or Monaco, with the connivance of Greek banks and politicians granting their wealthy friends and multinationals all kinds of tax advantages and favours that have diluted tax revenues to the point where there is not enough in the kitty to maintain public services. According to the Tax Justice Network, over a trillion dollars lie in offshore banks and companies in tax havens (not all Greek money of course). Recover this money and governments could not only reduce their debts but pave the way for a lowering of taxes across the board to encourage investment and growth and increase spending power for the majority.
Capital controls, public ownership of the banks and major corporate sectors to organise a plan for investment and growth: this is not just an alternative programme for Greece but for all of Europe.
Michael Roberts Blog 
Reblogged this on Representing the Mambo.
Well, either the current EU leadership drives full tilt into the brick wall, as you describe here, Mike, or…
To me it looks as if the next few months could see one of the great turnarounds of capitalist history. The howls for Keynesian expansion are growing deafening as the impossibility of imposing the “logical” austerity/deficit reduction/monetary solution becomes clearer and clearer. The tipping point seems to me to be very close at hand.
But where will the break rip open? So far all the actors are holding out. The governments and the EU and the IMF are insisting on austerity. The bourgeoisie continues setting itself impossible profit targets. The working class (despite despicable class treachery on the part of its political and union leaderships) refuses to fall down and die despite the bloody beating it’s been getting. Bourgeois democracy itself is refusing to curl up into a pupa and hatch fascism, despite all the authoritarian symptoms.
I think we can safely assume that neither of the classes will commit suicide.
Bourgeois democracy is far too useful still to dump – not least because the black hole Western fascism would give rise to would just let in the Russians, Indians, Brazilians and above all the Chinese.
Which leaves the whole of the current political establishment throughout Europe and the US. Rigid neo-liberal high-priests and hatchet-men.
We’ve seen the first wave of dismissals, but when the mob turns on a dime and speeds off the other way we’ll see a burning of lemmings that even Moscow in the 30s could envy.
You, Mike, and your economist colleagues will have a field day as yesterday’s truths flit away like bats and the hoary Keynesian truths are resurrected.
Capitalism is righting itself blindly and automatically according to the dictates of the Law of Value. Social labour needs to be divvied up in meaningful proportions, and it brooks no obstacles. The political-ideological regime of neo-liberalism is just such an obstacle and it’s about to be swept aside.
This is going to be quite a summer and autumn.
The terrifying shadow behind everything, of course, clearly revealed by your emphasis on the falling rate of profit, is that what the bourgeois system now needs is the destruction of an enormous over-accumulation of capital if it is to revive once more.
But for the moment let’s enjoy the spectacle of the bourgeois political and economic establishment covering itself in shit. While we ourselves, this time round, are compelled to put forward real solutions for the benefit of our class and the whole of society. Otherwise we’ll end up covered in shit and nuclear waste with the class enemy.
“But for the moment let’s enjoy the spectacle of the bourgeois political and economic establishment covering itself in shit.”
I don’t usually like to swear but this made me fucking angry, as if the recession is hitting the rich and not the poor. I am too busy trying to put food on the fucking table to gloat about the rich worrying if their second or third yacht is at risk.
So, Edgar, don’t gloat.
Move your eyes to my next sentence and get busy doing this instead: “we ourselves, this time round, are compelled to put forward real solutions for the benefit of our class and the whole of society.” If you don’t, you’ll be a slave to your table for the rest of eternity.
Your next sentence suggests the pain is yet to hit us. I have news for you, it is already here!
I won’t gloat because there is nothing to gloat about, the rich are doing fine thank you very much.
Why are you stuck on this, Edgar? My next sentence in no way suggests the pain is about to hit us. The pain is already here and has been here for far too long. It’s time we worked to set up a working class state running a non-capitalist economy, both in Britain and Europe and the world. Real solutions, not just whining about how bad things are. We know that and have known it for ever.
If you don’t gloat at an enemy’s discomfiture – well, bully for you, you have a noble soul. You’ve obviously never been part of a penalty shoot-out.
I am hung up on this becuase I regard your statement as typical of those Marxists/Leftists divorced from workers struggles.
Could you imagine trade union reps making such statements?
I may be making too much of this in your particular case (who knows?) but I think you should be careful of how you express yourself.
I prefer not to get into ideology as that does translate to action. Basically the choices are clear but none good. Stay in the Euro, put up with austerity and get the money needed to keep the country running.
Get out, have the currency (i.e. any money in the bank) devalued by 50%, default on the loans then try and find lenders willing to lend any money to keep the Gov’t running. I say no one will take that loan given historical repayment habits and growth potential.
I truly am sorry for the average Greek person but they are the facts that sit in front of them.
No other nation will exit the Euro as they have better choices than to exit.
I strongly agree with you that the rich Greeks have to start paying their share of taxes, (this is the case in a lot of countries, the U.S. as well). They don’t even necessarily need to be paying more as is always suggested in the progressive tax rhetoric, they just need to start paying as much. It would start with getting rid of a lot of the tax breaks that kick in for the uber-rich and other economic aid they get. If they can’t run a business profitably without big handouts and paying taxes like everyone else, than I have to agree with you in letting the government take them over.